Why Yellen Can Never Normalize Interest Rates

BALTIMORE – Yesterday, the Dow sold off – down 133 points. Oil traded in the $36 range.

And Donald J. Trump lost the Wisconsin primary to Ted Cruz.

Overall, world stocks have held up well, despite cascading evidence of impending doom.

U.S. corporate profits have been in decline since the second quarter of 2015.

Globally, 36 corporate bond issues have defaulted so far this year – up from 25 during the same period of 2015.

Economists at JPMorgan Chase put the U.S. economy growth rate for the first quarter at 0.7% – down by over one-third from earlier estimates.

And there is $1.7 trillion in junk bonds outstanding – a trillion more than in 2008. Some of these are sure to default in the months ahead.

Speculators are already shorting the banks with the biggest piles of these grenades in their vaults.

No Return to Normal

Over the last few days, we’ve been trying to coax out an insight.

It concerns whether Fed chief Janet Yellen really does have investors’ backs. Not that we have any doubt about her intentions.

Her career has been financed and nurtured by credit and the people who provide it. Crony capitalists, corrupt politicians, and Deep State hustlers paid good money for her; she’ll do all she can to avoid letting them down.

But something isn’t working. Not for her. Not for Bank of Japan governor Haruhiko Kuroda. Not for the president of the European Central Bank, Mario Draghi. Not for People’s Bank of China governor Zhou Xiaochuan.

Their tricks no longer work.

We’re on record with a bold prediction: The Fed will NEVER normalize interest rates.

Readers may wonder how that jives with our deeper insight: Nobody knows anything.

And of course, we don’t know whether the Fed will normalize or not. But let us further explain our reasoning; you make up your own mind as to where to place your bet.

The short version of our argument: For the last eight years, the Fed has tried to stimulate the economy with ultra-low interest rates. Business, consumers, and government now almost all depend on credit… and most need ultra-low rates to make ends meet.

Consumers are in better shape, generally, than they were in 2008. But corporations and governments are in worse shape. Raise the cost of funding, and you will push many of them over the edge.

Banks, pension funds, and insurance companies are especially vulnerable. They’re now stocked up with low-yield government bonds. Should interest rates rise, those bonds will go down in price.

In other words, raising rates will provoke the very calamity the Fed was trying to avoid: the bankruptcy of the financial sector.

The Triumph of Politics

But wait…

How did Bernanke, Yellen, Kuroda, Draghi et al think they would ever get away with it?

How could they believe – even for a minute – that a debt problem could be solved by adding more debt?

And yet, they always got away with it before.

After World War II, for example, the feds had a higher debt-to-GDP ratio than they have now. But after the war, the economy boomed, inflation rose… and soon the debt was no problem.

Again, at the beginning of President’s Reagan’s first term, economists worried about large government deficits.

The job of colleague David Stockman – director of Reagan’s budget team – was to bring those deficits under control. He failed… a story well told in his book The Triumph of Politics: Why the Reagan Revolution Failed.

Conservative economists thought the U.S. would sink into another slimy pool of deficits and debt. But once again, a spurt of growth (with low deficits) during the Clinton years reduced the debt to a more manageable level.

So, why worry?

Because this time, it’s not working. Growth is slowing. Productivity has stalled.

As former Goldman boy Gavyn Davies put it in the Financial Times: “The slowdown in labor productivity accounts for most of the massive disappointment in global output growth since just before the 2008 crash.”

Professor Robert Gordon at Northwestern University believes there is more to it than just a cyclical downturn. He maintains that the extraordinary growth of the Industrial Revolution had played itself out by the 1980s. And it can’t be repeated.

We have another hypothesis (which we’ll talk more about tomorrow): Either way, the debt can never, voluntarily, be brought under control. And the Fed can never “normalize” rates.

Expert Insight

BY PORTER STANSBERRY

Editor’s Note: Bill’s been warning about how NIRP will impact the money system ever since the feds came up with the screwy idea. Now his longtime friend and colleague Porter Stansberry is warning about another danger of NIRP… its impact on gold. The following is excerpted from a recent issue of The Stansberry Digest.

NIRP could trigger a massive, global "run on the bank" as everyone begins trying to hoard currency and gold to avoid the penalties being charged by the central banks for using paper money.

Trust me when I tell you… Policymakers in the U.S. are cognizant of this risk. This isn’t a doomsday scenario… It’s happening right now. These risks are exactly why gold has seen its biggest quarterly move higher in more than 30 years.

The run has started.

Look who is suddenly buying gold… former vice chairman of the investment bank Goldman Sachs John Thornton is now running Barrick Gold, one of the world’s largest gold producers. Goldman has already purchased three tons of physical gold for its house account.

Stanley Druckenmiller – one of the most successful investors of the last 30 years and former head of the Quantum Fund – holds about 30% of his personal portfolio in gold.

The same is true across the top echelon of Wall Street’s best hedge-fund managers: John Paulson owns stakes in several gold-mining companies. David Einhorn is a huge gold bull, with more than $100 million invested in gold stocks. Paul Singer says it’s the only real money. Ray Dalio – founder of Bridgewater, the largest hedge fund in the world – says, "If you don’t own gold, you know neither history nor economics."

I could go on, but you get the point. Billionaires are suddenly hoarding gold and expounding on its role in history. Doesn’t that make you wonder what’s really going on behind the scenes? More and more senior people in finance are buying huge amounts of gold. Why?

The only way to re-establish credibility and regain control of the financial system in the event of a global run on paper currencies would be to re-establish the U.S. dollar’s convertibility into gold. The Fed could offer to swap all of the Treasury bonds it holds (about $2.4 trillion) for all of the gold owned by the U.S. Treasury. When you do the math, you come with a new dollar-to-gold ratio of $9,677. Roughly $10,000 an ounce.

If this plan is adopted and formalized, it would be, without a doubt, the most highly classified, closely guarded financial secret in the world. I could be putting myself (and my company) in some jeopardy by sharing this information. But… that’s what I felt I had to do.

Please do not conflate the facts I report or the things I warn could happen with what I wish would occur. I do not hope for a global run on banks. I do not hope for the price of gold to soar to $10,000 an ounce. All of these things would be terrible for our country and for millions and millions of people around the world.

Believe me, I hope I’m completely wrong about all of these things. But for the first time in my career, I can clearly see that we’re careening toward a massive collapse of the paper-money system. In my view, it’s not a matter of "if." It’s a matter of "when."

Regards,

Porter Stansberry

Editor’s Note: Tonight, Porter is hosting an emergency briefing to discuss these risks in detail. More importantly, he’ll explain why he believes gold and gold stocks will soon be worth 10–30 times what they are today.

It’s not too late to reserve your spot for Stansberry Research’s first-ever, live event focusing on gold. Just click here now.

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Mailbag

The most dependable method is gold coins of new minting. Additional grams of bullion for small transactions is also advantageous.

Stay away from certificates and EFTs. They are not real. Real gold can be held in your hand. Find a safe, non-regulated location for your gold. A safety deposit box is not a good location, as it can be seized by court order.

Also, special vaulted locations are an easy target for seizure by authorities, as well as a get set up location for robbery. If you are thinking ahead to have gold as wealth retention, think ahead on how you secure your wealth against outside control.

– Jason S.

Again I ask, if gold should rise to $10,000/oz., what would a Starbucks Latte or a man’s suit cost? I doubt that we would like it.

– Larry W.

Bullion coins only, gold and silver. Take possession.

– Calvin H.

On the topic of how readers invest in precious metals, folks should strongly consider the option of Sprott’s Physical Gold and Silver Trusts (PHYS and PSLV).

They offer the convenience of exchange-traded assets like the GLD ETF, but they guarantee the shareholder a legal claim to physical bullion stored in the Royal Canadian Mint.

For many people, this option is probably the best combination of practicality, safety, and protection against a financial crisis and economic collapse. A bank failure could dissolve the [SPDR Gold Trust] GLD fund, but not PHYS and PSLV.

–Geoffrey C.

You keep on saying to own gold bullion. However, if there is an economic collapse, the government will immediately confiscate gold like FDR did in 1933. How is this safe?

– Barry H.

G’day. Here’s what I told a gold bug about a dozen years ago: Your gold stash might buy you a sheep station, after the collapse. But if all you need on a given day is a bag of potatoes, then you’ll need silver.

– Joseph E.

In Case You Missed it…

Yesterday, Bill and his top analyst, Chris Mayer, released part two of their video training series about the investing strategy that helped Chris beat the market by over 2-to-1 for a decade.

Peak oil mates, peak oil.
Physical realities trump economic and political ideologies every time.
The effects of peak oil are hiding behind the biggest debt bubble in history.
Those that deny peak oil do not understand it.

I believe I am experiencing this “credit stimulation” that is happening. Recently received a new Chase credit card with all the deals such as 0% APR for a year on purchases and balance transfers, cash back and all the goods. Since it is 0% APR I wanted to transfer a small balance on one Chase card to the other to save on the APR until the balance is paid. Chase does not allow balance transfers between cards. However they told me another option in that they would send me a check to use as I please. Confused and unaware of this option I was told “This is a great option. We will just send you a check for any amount that you like up to your credit limit on your account. You can then take that check, deposit it into your account, and use that “cash” for just about anything you like. It’s a great way to get that extra needed money.” I then asked if I could use the check to pay the balance on the one card and basically transfer the balance from one card to the other. The agent told me “Well, I cannot tell you what to do with the check and you can use it for that if you want. Remember though that you can use the “money” we will send to you for anything you want. Its a great option.”

Chase was more then willing to send me a check and “money” to do with whatever I want and the main question was to just transfer a balance from one card to the other. They wanted me to spend as much of my credit as possible instead of just responding to my simple request.